Streaming media sites may be penalized from the loss of ‘net neutrality’

By Amy DustoAssociate Editor

A federal appeals court has ruled Internet service providers should be able to charge web site operators fees based on the amount of data they transmit. That means web sites that stream lots of digital movies and TV shows like Netflix, Amazon and Hulu may face substantial fees for their Internet service in the near future, experts say.

Streaming media web sites like Netflix Inc., Amazon.com Inc. or Hulu LLC may soon be paying more for every gigabyte of data they send. On Tuesday, the D.C. Circuit Court of Appeals ruled in the case Verizon v. FCC that Verizon Wireless Inc. and other Internet service providers (ISPs) are allowed to charge fees based on the amount of data a web site transmits.

That ruling reversed the Federal Communications Commission policy known as “net neutrality” that required that all Internet traffic be charged at the same rate, a policy favored by President Barack Obama.

For most web retailers, business won’t change, says Steve DelBianco, executive director of NetChoice, a lobbying group for retail companies and organizations including eBay Inc., Overstock.com Inc. and the Electronic Retailing Association. “But if a web site sends huge amounts of streaming or downloaded content, they might expect Internet service providers to consider charging them to deliver that content at higher speeds or reliability,” he says. Still, he doesn’t think that’s likely since most ISPs have reported they won’t make any changes until the FCC creates new regulations based on the ruling.

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Other experts, however, say streaming media web sites may face new fees within the year.

“We expect ISPs to behave as if they were profit-motivated, and think that they will seek to extract as much value from web sites as the court’s ruling will permit,” writes Michael Pachter, an analyst at investment firm Wedbush Securities Inc., in a research note regarding the news. “It is impossible to predict how this will play out in dollar terms, but directionally, it should mean higher payments by Netflix and/or by Netflix subscribers.”

Most likely, the ruling will not be appealed for at least several years and the ISPs will adopt fee changes within the next several months, Pachter and his colleagues predict.

Internet bandwidth providers like Verizon and Comcast argue that they have had to invest heavily to carry the huge amounts of video data coming from a handful of sites, and that those companies profiting from streaming video should pay for the added capacity.

In North America, Netflix accounted for 31.6% of all data sent to computers in September 2013 and Google Inc.’s YouTube accounts for another 18.6%, according to a report by Canadian broadband services company Sandvine. Those companies would be the most impacted by pricing based on the volume of data transmitted. Netflix did not immediately responded to a request for comments. YouTube, via parent company Google Inc., declined to comment. Hulu, which streams TV shows, accounted for 1.29% of September traffic and Amazon, whose video streaming service is a perk for members of its Amazon Prime shipping program, accounted for 1.61%.

ISPs have been free to charge consumers or businesses based on the Internet bandwidth they use, as mobile phone providers commonly do, but most have been reluctant to cap customer data usage that way, Pachter and his colleagues write. “It is our view that ISPs fought so hard to eliminate the net neutrality rules because they have always hoped to charge web sites, which would in turn pass the costs onto their advertisers or customers,” they say. “The elimination of net neutrality suggests to us that the ISPs find it more palatable to squeeze the data provider, not the customers.”

They would seem to be correct, at least in Verizon’s case.

“Today’s decision will not change consumers’ ability to access and use the Internet as they do now,” says Verizon executive vice president, public policy and general counsel Randal Milch. “Verizon has been and remains committed to the open Internet, which provides consumers with competitive choices and unblocked access to lawful websites and content when, where and how they want. This will not change in light of the court’s decision.”

Wedbush calculates that Netflix’s 30 million U.S. customers, who each on average watch 40 hours of content per month with data transmission rates of either 1 gigabyte (GB) per hour or 6.5 GB per hour for high-definition TV shows and movies, together consume between 14.4 billion GB and 93.6 billion GB of data per year—a wide range because it encompasses the lowest to highest possible amounts of data transmission that could reasonably be estimated. Thus, if ISPs decide to charge just one extra penny per gigabyte of data Netflix transmits, for example, the retailer would have to pay between $144 million and $936 million in annual fees to maintain its current level of data transmission, the analysts write.

ISPs charging web sites one penny or more per gigabyte of data is realistic, they add, based on estimations that, across 85 million households, the average U.S. consumer pays an average of $500 per year (or between $0.20 and $0.40 per gigabyte of data) for Internet access, totaling $40 billion annually. In order for ISPs to gain 2% to 5% in revenue with the repeal of net neutrality rules, then, they would have to charge at least one cent per gigabyte. If that happened, Netflix would have to either absorb the costs (at a price of $360 million per year) to keep its monthly subscription pricing at $7.99, or raise its monthly subscription prices by $1.00, to $8.99 per month, the analysts say.

Another possibility is that ISPs will continue allowing Netflix and other web sites to transmit up to a certain amount of data for free, charging higher rates only for consumption above a minimum threshold.